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Did you start saving late? NPS vs SIP, Which is a better investment plan?

Karan Sharma Karan Sharma 06 June 2019

NPS and SIP are two of the most preferred investment options for retirement. Find how.

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Got no clue about retirement? Don’t worry, it is not the end of the world. It is never too late for anything. Retirement is that stage of life where you are required to live a stress-free life. Under retirement, you cannot work full time. You need to focus on your health as well as your spouse who has aged with you. The best way to take care of all these uncertainties is have a good retirement plan.

As per a report published by HSBC in September 2018, ‘one third Indians save regularly for their retirement while just 33 per cent of working-age respondents globally are putting anything aside for their later life’ and ‘53% people save for short-term goals rather than longer term plans.’

The report has also stated that the primary reason for this is the lack of knowledge on how much money is needed for retirement. Did you know that even if you start late in life, you can still have a decent retired life? You can invest in a National Pension Scheme (NPS) or a Systematic Investment Plan. Both are ideal investment options for retirement.

To begin with, let us understand each option independently followed by a detailed comparison.

National Pension Scheme (NPS)

The National Pension Scheme (NPS) is a social security scheme launched by the Government of India for workers in the private, public, unorganized sector (except the armed forces). The purpose of NPS is to encourage people to save money at regular intervals for retirement pension. When you reach the age of retirement, you can withdraw a certain amount of the corpus. The remainder is disbursed as monthly pensions post retirement.

Earlier, NPS covered the employees of central government. But now, it is open to all citizens. The NPS is ideal for any member of the working class as the scheme is portable across jobs and locations.

Benefits of NPS

The benefits of NPS are:

  1. Voluntary - You can contribute at any point of time in a financial year and also change the amount you set aside and save every year.
  2. Simple - You are required to open an account with any one of the POPs (Point of Presence) or through eNPS (
  3. Flexible - You can choose your own investment options and pension fund and see the money grow.
  4. Portable - You can operate your account from anywhere, even if you change the city and/or employer.
  5. Regulated - NPS is regulated by PFRDA, with transparent investment norms and regular monitoring and performance review of fund managers by NPS Trust.

Note: Sourced from the official website of NSDL e-Governance Infrastructure Limited, Central Recordkeeping Agency for National Pension System.

Systematic Investment Plan (SIP) in a Mutual Fund

A SIP or Systematic Investment Plan is an option available for investing money on a regular basis in a mutual fund. Under a SIP, a fixed amount is debited from your account on a monthly basis and is used to purchase units of your chosen mutual fund. SIP in mutual funds are beneficial as they offer savings as well as wealth creation benefits.

Benefits of SIP

The benefits of SIP are:

  1. Convenient - An SIP inculcates the habit of regular savings. You can start an SIP with an amount as small as ₹ 100 or 500.
  2. Rupee Cost Averaging - Rupee Cost Averaging reduces your overall cost of investment. You buy units irrespective of market volatility.
  3. Power of compounding - When you stay invested for a longer term, your investment is subjected to compounding. Compound interest brings better long-term benefits in comparison to a lump sum investment.
  4. Higher Returns - SIP in mutual funds offer higher returns in comparison to traditional fixed deposits and recurring deposits.
  5. Disciplined Investing - An SIP makes you a disciplined investor. You simply need to set a standing instruction and the money is automatically debited from your account and is used to purchase a mutual fund.
  6. Emergency Fund - You can withdraw your entire investment from a mutual fund at any time. This is beneficial in case of an emergency.

Income Tax Benefits

Both (NPS and SIP) offer tax benefits under Section 80C of the Income Tax Act, 1961. For SIP in Mutual Funds, you need to invest in Equity Linked Savings Scheme. An ELSS is a type of equity based mutual fund under which the investor is eligible for tax deductions of upto ₹1.5 lakhs per annum. If you invest ₹12,500 monthly in an ELSS scheme, it amounts to ₹1.5 lakh for a financial year. NPS is a government backed investment scheme. Apart from the Section 80C deduction of 1.5 lakhs, you can also claim an additional deduction of ₹50,000 under Section 80CCD (1B) of the Income Tax Act, 1961.

Risk vs Returns

Both (NPS and SIP) are equity based products. Equity based products offer market-linked returns and markets are volatile. Under an NPS, 75% of your investment portfolio is put in equities while the remaining 25% is put in debt funds. On the other hand, ELSS is a 100% equity based product. But a SIP in an ELSS plan will offer higher returns over the long run for retirement.

Lock-in Period

The lock-in period is the mandatory time period under which you cannot withdraw your investment from a scheme. An ELSS mutual fund comes with a lock-in period of 3 years while you can withdraw from an NPS only after the age of 60 years or retirement. Either way, you can invest in both the schemes for maximum benefits.

Income Tax

Both (NPS and SIP) offer tax benefits, but the returns are still subject to tax. In the case of NPS, from the 60% of the amount withdrawn at retirement, 40% is free while the remaining 20% is subject to tax.

SIP mutual funds are subject to long-term capital gains tax (LTCG) provided the returns are more than ₹1 lakh. You can withdraw your entire ELSS investment on retirement. If the returns are over and above ₹1 lakh, it will be subject to an LTCG of 10%.

Bottom Line

NPS and SIP mutual funds are both excellent options for investment in case of a delayed retirement planning. If you have a short term investment horizon of 4-5 years, SIP is suitable option. If you are looking for a government backed option, NPS should be a preferred option.

Karan Sharma
Written by Karan Sharma
Content Specialist and Strategist, foolishly creative and always ready for a game of 'Call of Duty'.